Vodafone to land Kabel Deutschland in €7.7B deal

Vodafone agreed to buy Kabel Deutschland for €7.7 billion ($10.1 billion) in a deal that will enable the operator to pursue its multi-service ambitions in its most important European market.

The operator said in a statement it will offer €87 per share, which exceeds previous offers by both Vodafone and Liberty Global that were believed to be around €85 per share. It said it has the full support of the Kabel Deutschland board, which will recommend the offer to shareholders.

It's not clear what Liberty Global's next move might be, although analysts are doubtful that the U.S. cable group will come back with a competing offer.

"Although you should never underestimate someone as aggressive as [Liberty Global owner John] Malone, it is very difficult to see how Liberty could make a bid in cash that would be higher than what KDG (Kabel Deutschland) already considers a good price," one unnamed source close to the German group told Reuters.

The Kabel Deutschland purchase will help fulfill Vodafone's ambitions to be able to offer "quad-play" packages of fixed voice, broadband and TV services together with mobile services in Germany in order to better compete with rivals in the market. The company will gain access to 5 million broadband and 7.6 million direct TV customers in Germany, which will add to its 32.4 million mobile customers.

"This will instantly make Vodafone the largest pay-TV provider in the country and the second-largest fixed broadband provider," noted Emeka Obiodu, principal analyst at Ovum. "Vodafone is already the second-largest mobile telco in Germany."

How much the merger will aid consumers in the market is not as clear-cut. Although they will likely be offered discounts on package combinations, Germany already has among the highest mobile data prices in Europe according to Rewheel, and quad-play will only serve to lock them into these plans. Previous reports have suggested that markets such as Germany need a "maverick" player to come in and shake prices up, as was the case in France with Free Mobile, rather than a further consolidation of industry heavyweights.

For Vodafone, the deal certainly reflects a need to branch out from mobile services in Europe, where markets are saturated and prices are falling.

Vodafone said the combination of Vodafone and Kabel Deutschland will create an integrated communications operator with €11.5 billion of pro forma revenues in Germany, offering unified communications services to both consumer and enterprise customer. Vodafone added that it expected synergies from the deal to exceed €300 million a year before integration costs, by the fourth full-year following completion. It also sees potential for revenue synergies of €1.5 billion from cross-selling products and improved customer loyalty.

"By adding Kabel Deutschland's fixed broadband and pay-TV customers, Vodafone is hoping to tap into other sources of additional revenue in the market," Obiodu said.

Ovum said it expects revenues from the cable broadband market in Germany to grow by a compound annual growth rate of 4 per cent between 2013 and 2018. On the other hand, mobile telecoms revenues in Germany are expected to fall by a compound annual growth rate of 1 per cent between 2013 and 2018.

"This deal demonstrates the pragmatism of Vodafone," Obiodu said. "Whereas Vodafone was regarded as a mobile telecoms company in the past, its quest for survival in Europe means it is prepared to jettison its ideological purity."

Analysts have raised some concerns that this will signal the start of a spending spree by Vodafone, which does not have the best track record in M&A. Obiodu noted that the deal is Vodafone's largest single M&A since it entered the Indian market in 2007.

Vodafone has already said it does not need to sell its Verizon Wireless stake to fund the transaction, and said it will finance the offer--to be made through Vodafone Vierte Verwaltungsgesellschaft mbH--from its existing cash resources and committed but undrawn bank facilities.

Obiodu also noted that Vodafone might want to replicate its German strategy in other markets: "If Vodafone becomes Germany's largest pay-TV provider, why would it not want to do the same in the UK, Spain, Italy or Netherlands? Watch this space," he said.

For more:
- see this Reuters article
- see this Bloomberg article
- see this Financial Times article (sub. req.)

Related Articles:
Reports: Vodafone, Liberty Global vie over Kabel Deutschland
Report: Vodafone adds Fastweb to shopping wish list
Liberty Global eyes Kabel Deutschland acquisition
Vodafone confirms early talks with Kabel Deutschland
Report: Vodafone still eyeing Kabel Deutschland purchase

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